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Small yet plentiful is name of game in metals deal-making

Monday 1st March 2010
By Mike Jones

The steep fall in metals deal value continued in 2009 with total value charting a course which took it back to below levels last seen in 2003. A distinguishing characteristic of this recession, however, has been the lack of major bankruptcies.
Companies instead moved swiftly to conserve cash and protect margins. Partly in consequence, the number of M&A deals in 2009 remained high but for much smaller sizes with average deal value at just US$56.2 million compared to US$274.2 million in 2008. Total deal value, at US$15.1billion, was down 75% year on year and was barely a tenth of the record high reached in 2007, according to "Forging Ahead", PwC’s annual review of M&A activity in the metals sector.

Nearly three quarters (71%) of the deal value occurred in domestic deals rather than cross-border deals, unlike in the previous two years when the pattern was almost the opposite with around two thirds of deal value conducted cross-border. 

Metals deal values plummeted around the world but it was in North America and Europe where they dwindled to negligible levels. The North American metals deals total was just US$1.6billion in 2009, down from US$76.7billion in 2007 and US$17.2billion in 2008. Europe and the Russian Federation followed a similar pattern with a total deal value of just US$1.0billion. Instead it was deals in Asia Pacific and South America, led by China and Brazil, which delivered the majority of 2009 metals deal value with the two regions together accounting for 83% of worldwide total.

Jim Forbes, global metals leader, PricewaterhouseCoopers, said: "Deal-making was largely restricted, with some exceptions, to relatively conservative minority and incremental stake-building in targets on the growth side and divestment of non-core assets to manage the balance sheet.

"Constrained financing and high levels of existing debt led to a large degree of M&A caution. Credit remained available but the banking crisis restricted the range and raised the cost of financing. Moves to reach down the supply chain to secure raw materials resources, and thereby ease reliance on the annual pricing cycle, continue to be an important feature of the metals deals landscape, particularly among Chinese companies. But deals of this kind were not as common as in previous years."

Although deal values were down, more deals completed in 2009 than any other year in its reporting series, PwC said. Part of this was balance sheet housekeeping spurred by the steep recession and fall-off in metals prices. Restructuring in the Russian metals sector was also a factor in the high number of deals with 57 Russian deals among the 521 deals listed, all but one of them with no disclosed value.

The geographical centre of gravity for metals deals continues to shift towards Asia Pacific. The Asia Pacific share of worldwide deal value had already multiplied more than five-fold between 2007 and 2008. In 2009 it nearly doubled again with Asia Pacific accounting for 50% of total value.

Total deal value fell substantially in all regions with the highest falls recorded in North America and western Europe where values dwindled to less than 10% of the level seen just a year earlier and to a startling 2% and 3% respectively of the total deal value reached in 2007. Deal numbers increased in all regions with the exception of North America.

Forbes said: "Despite some consolidation in recent years, the steel and iron ore sectors, in particular, remain relatively fragmented. This is the case both regionally and globally. With liquidity returning to the market place and, importantly, the capital markets more accessible for equity deals, the logic of consolidation may prompt some significant deals. Whether there is such a deal flow will depend on companies’ assessment of the strength of any recovery."

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